From Bloomberg.com we get the headline "Treasuries' Scarcity Triggers Repo
Market Failures", by Liz Capo McCormick, which is probably very scary, but I
have no idea what the hell she is even talking about or why it is important,
neither of which is made any clearer when the article explains, "In a
repurchase agreement, or repo, a customer provides cash to a dealer in exchange
for a bill, note or bond. The exchange is reversed the next day, with the
customer receiving interest on the overnight loan. A Treasury security is
termed on 'special' when it is in such demand that owners can borrow cash
against it at interest rates lower than the general collateral rate", which is,
in this case, so I gather, Treasury debt.
I cleverly sense that I am too stupid to make money with this
complicated news, but I do understand the part that went, "Surging demand for
US Treasuries is causing failures to deliver or receive government debt in the
$6.3 trillion a day market for borrowing and lending to climb to the highest
level in almost four years", because it means that lots of guys are essentially
naked short in Treasury bonds, the price went up too high for them to buy the
bonds to cover their short position, and now they can't pay up.
This is partially being alleviated through the simple expedient of trillions of
dollars in new money that the Fed and Treasury are trying to pound into the
economy, which has to go somewhere; and it is apparently going into Treasury
debt and driving the prices of bonds So Freaking High (SFH) that the guys who
are short bonds are getting clobbered, and especially guys who are naked short
in bonds, and doubly especially those who guys who are leveraged to the hilt to
multiply their potential gains (and their risk!), none of whom can buy to cover
their losing position since they are actually already wiped out a dozen times
over.
So they, too, take The Mogambo Way Out (TMWO), which is to just wait for
nightfall, sneak into the office, loot the petty cash fund and go somewhere new
to start over in a new town, with a new name, a new suit and a snazzy new pair
of shoes. Maybe a nice new car, too!
Anyway, these days, they don't call it "Thieving little bastard on the lam"
anymore. Today they call it "failure to deliver"! Hahaha! I love this stuff!
Anyway, I kinda figure that this is actually kind of interesting, as it means
that the $6.3 trillion daily turnover (float) of Treasury debt is about 60% of
the sheer number of US Treasuries extant today (national debt = $10.5
trillion), and is actually about equal to the entire $7 trillion national debt
of just four years ago, too! Hahaha! We are so doomed!
Ms McCormick obviously sees what I think is my clever observation as being
childishly elementary, and tries to regain a little momentum for the adults in
the room by saying that the numbers are pretty impressive, as, "Failures, an
indication of scarcity, surged to $1.795 trillion in the week ended March 5,
the highest since May 2004, and up from $374 billion the prior week."
Well, I say that this may well be an "indication of scarcity", but it is also
an indication of the demand being so high that the price has risen to the point
where the yield on the bonds is less than 4%! "Official inflation" is 4.6%!
Real inflation is higher than 10%! And yet people want these things so badly
that they will accept less than half the rate of inflation, all taxable, to own
them! Wow!
Well, they obviously note the sarcasm in my voice and wisely choose not to get
into a long and pointless argument with me; but they do concede that demand
financed by all of this new money being poured into economies Around The
Freaking World (ATFW) has resulted in "Investors seeking the safety of
government debt amid the loss of confidence in credit markets [which has]
pushed rates on three-month bills" way, way down, and which are, right now,
yielding 0.19%! Hahaha! One-fifth of one percent! On a hundred dollars invested
in 3-month bills, you earn 19 cents a year! Hahaha!
At twice this level, at 0.387%, it was "the lowest level since 1954". The
lowest yield in 55 years, more than a half century! Hahahaha! With inflation in
prices running at more than 10%, and inflation in credit running at up to 100%
and more, bond investors are getting the lowest yield in half a freaking
century? Hahahaha! Morons!
Apparently, Ms McCormick does not appreciate my unsolicited-yet-stupid
comments, and sticks pretty much to the dismal fact that guys are getting
screwed at record rates as "Treasury fails rose to a record $3.244 trillion in
the week ended Aug 20, 2003, the highest to date through July 1990, or as far
back as the New York Fed tracks the data on its Web site." So we could be
talking "in all of history" here!
As a comparison, she offers the fact that failures to deliver is way up, as
"For the month of August 2003, the weekly average was $2.751 trillion."
Apparently, Andrew Williams, a spokesman for the New York Fed, knew that I was
going to latch onto this like a hungry piranha on the shapely leg of a
beautiful woman wading across a river while exploring the remorseless South
American jungle, and the article discloses that the little coward "declined to
comment on the fails data", probably because he knows that as soon as I had him
on the witness stand, I would have started with my vicious cross-examination
("Tell me, Mr Williams, does the Federal Reserve actually delight in creating
so much money and credit, so that the government can borrow and spend it, that
consumer prices rise and rise, more and more, until little children start going
to bed hungry, and their pitiful little cries remind their parents that they
are pretty hungry, too, all because their money and their wealth was destroyed
by you, your filthy Federal Reserve and Congressional ilk condoning the
creation of excess money and credit?").
Since he did not testify, I now bring to the witness stand Howard S Katz, of
the goldbug.net, concerning his essay "Economic Basics and Today's Gold Market"
posted at goldseek.com, where he explains that you can "cut through an awful
lot of nonsense in economics if we just understand that there are only two
things which can happen: expansion or contraction. And if we want to know
which, all we need to do is look at the money supply figures published by the
Fed."
So, somehow knowing that I am too lazy to look up anything, he obligingly does
the work for me, and says, "The monetary base has increased by 35% in the past
six weeks. This does not look to me like a contraction. It looks like the
biggest expansion in US history."
Here is where I tried to interrupt to bring up the same tired point that I
always bring up, which is that an such an excessive expansion in the money
supply that can be described as "the biggest expansion in US history" must
result in inflation in consumer prices that can also be described as "the
highest in US history", and that rates at least two exclamation points!! Maybe
three!!!
But Mr Katz is too smart to let me get a word in edgewise, particularly about
punctuation, and preempts me by saying "This surely is one of the great buying
opportunities for gold and gold stocks that gold bugs will ever see."
Perhaps hearing us talk of money supplies, and probably since parallels to the
Great Depression are all the rage these days, Junior Mogambo Ranger (JMR)
George L has looked at the two money supply situations and says that one can
estimate "how much money will be printed before this recession, or whatever it
is, is over."
Intrigued, I listen as he goes on "In the 1930s, FDR revalued gold from
$20.67/oz. to $35/oz - a 69% increase, corresponding to a 69% devaluation in
the dollar. There's your answer."
I angrily think to myself, "What? What is the answer? I don't see any answer!
What in the hell is he talking about? Will somebody please tell me what in the
hell is the freaking answer? I just don't see it!"
Fortunately, before I had to take any action to force somebody to tell me the
answer, JMR George happily supplies the answer! He says "if the money supply
started at, say, $10 trillion, it would have to expand to $30 trillion, or so,
to achieve the same effect."
The same effect? Hahaha! Tripling the money supply achieves total failure?
Hahaha!
But apparently so, as Mish of the globaleconomicanalysis.blogspot.com was
talking to Paul Kasriel of Northern Trust, and he said "Most people are not
aware of actions the Fed took during the Great Depression. [Federal Reserve
chairman Ben] Bernanke claims that the Fed did not act strong enough during the
Great Depression. This is simply not true. The Fed slashed interest rates and
injected huge sums of base money but it did no good. More recently, Japan did
the same thing. It also did no good."
And now the Fed and the Treasury and the Congress are doing what? Hahahahaha!
Richard Daughty is general partner and COO for Smith Consultant Group,
serving the financial and medical communities, and the editor of The Mogambo
Guru economic newsletter - an avocational exercise to heap disrespect on those
who desperately deserve it.
(Republished with permission from
The Daily Reckoning. Copyright 2008, The Daily Reckoning.)
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